Accommodating a rising Asia

A new institution is needed in which the emerging world has a large voice, much more than in the Bretton Woods ones.

There is a reason why it has been so difficult for the West and Japan to find a solution to their growing problems. This was not the case after the Second World War when the victors assembled in a small resort in the United States to craft a new world economic order, which came to be called the Bretton Woods system. Politics then was on the side of economics. It was not hard to argue and hence convince the voters that it would not pay to punish those who were defeated in the conflict. That was done after the First World War and the result was another global conflagration.

The first order of business at Bretton Woods was to rebuild Europe and since the United States was the only country with the resources to do that, it took the lead. John Maynard Keynes provided the intellectual underpinning of the ‘big idea’ developed at Bretton Woods. It was not hard for him to persuade those attending the conference that the disaster left by the about-to-be concluded war could only be dealt with by the states working together. That work had to be done in the fields of finance and development, and that would need new institutions. These were founded and became the International Monetary Fund and the World Bank.

The current crises in the global economy are different. They are the consequence of large changes in the make-up of the societies of the richer parts of the world. These changes have crept up slowly but coming together have produced a situation that can be resolved only by the articulation of a new ‘big idea’. This idea has to deal simultaneously with four developments: aging of the populations in Japan and the West, growing income inequalities in these countries that cannot be sustained in democratic societies, expectations that the state will provide security to those not in the work force and loss of confidence in the working of the state. That there are contradictions in some of these expectations can only be brought home to the voting population by leaders who are prepared to lead. Those don’t seem to be around at this time.

It may be a bit of a stretch to suggest that the future of the global economy could be driven by Asia. The continent may have some of the largest economies in the world but in terms of per capita income its citizens are about one-tenth as rich as the West and Japan. But the Asian continent is on the right side of the development equation. It has young populations, relatively strong states, large foreign exchange reserves and strong economic links with the world’s older economies. The last of these three is what gives Asia the leverage to author the big idea. It has become clear that no single country can provide the resources needed by Europe to save some of its parts from bankruptcy. Asia has the financial wherewithal to fund the facility the Europeans have put in place to aid the countries experiencing stress. The Cannes summit failed to provide the European Financial Stability Facility the financial resources it needed. Appeals were made to the BRIC leaders attending the summit to use their large surpluses to help EFSF but they demurred. It was right for them to show reluctance. They were being asked to either fund the EFSF directly or by expanding the resource base of the IMF. Doing the former would have made some economic sense since the returns on these resources would be much higher than those available from other relatively safe investments such as US treasury bonds. The latter would have made some political sense since the BRICs, in return for help, could have asked for a larger role in the running of the IMF. But that would have been incremental change.

The United States’ leadership has noted the rapid change in the structure of the global economy brought about by Asia’s rise. In an article titled “America’s Pacific Century” published in the November issue of Foreign Policy, the US secretary of state provided reasons why harnessing Asia’s growth and dynamism should be central to American economic strategic interests and a key priority for President Barack Obama. The article appeared on the eve of the American president’s third visit to Asia since coming into office. This visit took him to attend and the East Asia Summit in Bali, Indonesia as well as to the Asia Pacific Economic Cooperation summit in Hawaii.

The United States is working on bringing about an incremental change in the institutional structure of the global economy in order to accommodate rising Asia. What is needed, however, is a new institution in which the emerging world has a large voice, much more than seems possible in the Bretton Woods institutions. The older economies are reluctant to yield power to the emerging states. This was amply demonstrated when, following the resignation of Dominique Strauss Kahn, a French politician, the international community went looking for a new head of the IMF. It chose another French citizen, this time a woman who had served as finance minister in the government headed by President Nicolas Sarkozy, to replace Strauss Kahn even though there was expression of interest in the job by the citizens of some of the large emerging markets. The established order was not ready to pass on the baton.

Several emerging markets, in particular those in Asia, now have the financial clout to play a more meaningful and assertive role in the arena of international economics. They can also persuade the West to adopt some of the policies that would ease its economic difficulties. This is precisely what the West did when some of the important emerging economies were affected first by the Latin American debt crisis and later by the financial crisis in emerging Asia. In retrospect, it was a mistake to impose on these countries the role of the state which did more damage than good not only in the emerging world but later in rich countries as well. The shoe now is on the other foot.

Published in The Express Tribune, November 14^th,  2011.